Thursday, December 6, 2012

Compensation & Benefits - Squeezing The Balloon

Most American companies commit 65 - 70% of revenues to employee compensation and benefits. That leaves roughly 30% of revenues to pay for rent, computers and other equipment, travel, marketing and other non-employee expenses. This really does not leave much for investment in new initiatives that might represent future growth and development, which is the reason some companies borrow money to fund new initiatives; though that just means money needed to go into debt service. Yet, some times employees just don't understand why they don't receive higher merit increases, bonuses, or other incentives.Unlike national governments, companies can't print money and going into debt to pay employees is a road to fiscal disaster.

Employees often focus on base salary and perhaps bonuses, or other incentives as their compensation, when in fact benefits can add any where from 25 - 100% times base salary to arrive at total compensation and benefits, depending on country. So in the United States, as medical premiums have been going up by double digits for years, it has meant meager merit increases, while at the same time every US employee is costing American companies more and more. The employee does not necessarily see it because monthly paychecks have not gone up much; but most companies certainly feel it as cost continue to increase. This is the reason many jobs have been off-shored to lower cost countries.

Ultimately, there is only so much a company can charge for its goods and services. As such, it is a pipe dream to think that any company can just ignore rising employee costs in many countries. In some cases, where unions in the private sector have been involved, using collective bargaining to extract unreasonable compensation and benefits, companies have been forced into bankruptcy. The most recent example is Hostess Brands; but the same could be said for General Motors and Chrysler that ultimately did file bankruptcy, even with federal government bail outs.

Benefits are becoming a bigger and bigger part of total compensation. And, as cost go up for medical and other benefits, this is just squeezing the balloon because then there is less money for higher salaries and for funding the growth and development of a company, which has future implications. It is really important for all employees to understand this reality. The role of Senior Management is to balance resource demands recognizing that the first job of any CEO is to insure the financial stability of the company.

This is the reason this CEO Blogger approves all headcount requests, whether for replacements, or new positions.Since every time we add employees, there must also be a corresponding increase in revenues to insure profitability, there is probably no more important decision a CEO can make than approval of headcount.

In big companies, it often works in reverse. Big bureaucracies are self perpetuating and often just grow and grow until one day the CEO realizes that revenues and expenses are out of kilter. When that happens, we hear of thousands of employees being laid off by a company. Small or Mid Sizes companies are often closer to this process, since adding people becomes a more obvious decision, as part of day to day management. Clearly, an important part of minding the store is dealing with Compensation and Benefits. While it would be nice to give employees more and more, it is a road to bankruptcy and that will never happen as long as this CEO Blogger is in charge.